MILAN — The digital world is beckoning — and Prada is responding.
The Milan-based fashion group is focusing on expanding its online reach and chief executive officer Patrizio Bertelli discussed the implications of such a strategy as he commented on 2016 figures during a conference call with analysts on Wednesday. Last year saw another steep decline in Prada’s net profits, as well as a drop in group sales.
To help reverse the downward trend, Bertelli said he had tapped a new team fully dedicated to develop the group’s digital strategy, led by Chiara Tosato. The first wave of the global e-commerce platform will be rolled out by the end of the year in China, South Korea, Australia, New Zealand and Russia, with other countries to follow in 2018.
The company is accelerating the rollout of the ready-to-wear collections online, launching Prada’s women’s and men’s rtw and Miu Miu women’s rtw on its own e-commerce platform. Bertelli said he expected all products across all brands to be available online by the end of the year.
In line with this strategy, there will be a relaunch of the Prada and Miu Miu web sites in the summer “to improve the experience, make it more appealing, improve the CRM [customer relationship management] system, for a more consistent online experience, and storytelling based on Prada’s DNA,” Bertelli observed.
There will also be localized web sites for China, other major Asian markets and the Middle East.
“We are aiming for a stronger link between social media and sales, and an ambitious multiplatform marketing strategy blurring off-line and online. We want to convert the presence of social media into sales, deepening the connection on social media, and stores will become a strong platform for digital activities,” Bertelli continued.
The integrated e-commerce offer will be complementary to the activities of the physical stores, he added, noting that the wholesale channel has become a digital activity as well. Bertelli said he was “evaluating other partners” to further grow the channel. He added that the e-commerce channel will “increase the visibility of wholesale and drive attention to it.” He also noted that the company is reducing its investments in print ads, compared to the digital channel, directing 25 to 30 percent of the communication budget to the latter.
Bertelli emphasized the opening of 30 to 40 pop-up stores in 2017, with three opening in Japan this month. The executive explained this format allows the brand to present new products, “create excitement, they are quick, fun and allow to come up with exciting proposals.”
He admitted that last year had been challenging but said the steps taken to gain steam were already showing “satisfactory” economic results. The executive emphasized how the company could rely on a leaner structure, the new digital organization and the launch of new products that, together with cost-cutting measures, will allow the group to put 2016 behind it and see future growth. Bertelli already pointed to an improvement in the second half, and in the final quarter of last year.
His comments came against a backdrop of a terrible 2016, when net profits dived 15.8 percent to 278.3 million euros, or $306.1 million, in the fiscal year ended Jan. 31, compared with 330.9 million euros, or $364 million in the same period last year. The decline in net profits last year came on top of a 26.6 percent fall in net profits in the year ended Jan. 31, 2016.
Confirming preliminary figures reported in February, in the 12 months ended Jan. 31, the company registered a 10 percent decrease in sales to 3.18 billion euros, or $3.37 billion, compared with 3.54 billion euros, or $3.91 billion in the same period last year.
Earnings before interest, taxes, depreciation and amortization totaled 653.4 million euros, or $718.7 million, down 19 percent compared with 802.8 million euros, or $883 million.
Operating profit was down 14 percent to 431.2 million euros, or $474.3 million, compared with 503 million euros, or $553.3 million,
Chief financial officer Alessandra Cozzani emphasized the group’s efforts to improve its industrial efficiency, progressively reducing costs, cutting inventory and generating a positive net financial position that allowed the company to self-finance its investments and capital expenditures.
Leveraging a more flexible organization, Bertelli said the company has “reduced spending on consultants, trimmed discretionary costs, negotiated rents, with a more efficient production planning, reduced capex in the year, and shifted investments from store openings to renovations.”
The company has been rejigging its store network, and Bertelli took the opportunity to take a jab at landlords and “their illogical demands for rent increases. This is a position against trend, in such a retail property market, especially since most brands are turning more to digital.”
In the fiscal year, the group opened 28 stores and closed 26 units, renovating 40 locations. Prada has earmarked 50 stores for renovation in 2017.
At the end of January, there were 620 directly operated stores. Speaking of a store opening in Brussels, Bertelli said the company is working on giving it “a new identity.” These new-era stores “should be designed for new consumers, who have a different approach as they are now used to looking at everything [digitally] without being seen. Before, you had to walk in stores and talk to sales associates. This means retail stores need to have incentives and look more exciting.”
Bertelli said the company had seen an improvement in retail in December and January. Like-for-like sales were “positive enough” in February and March, Bertelli said.
In the year, the retail channel was down 14 percent to 2.63 billion euros, or $2.9 billion, but the company saw a progressive improvement in the trend in the second half, especially in the last quarter. The wholesale channel was up 13 percent to 504.4 million euros, or $554.8 million, lifted by new partnerships with e-tailers such as Net-a-porter and Mytheresa launched in July and Mr Porter in September, which Bertelli defined as “excellent.”
The licensed business grew 3 percent as both eyewear and fragrances saw positive trends, generating royalties of 45 million euros, or $49.5 million. “We see no signs of slowing down in licensing,” Bertelli said.
Sales in Europe were down 8 percent due to mixed trading conditions, reaching 1.19 billion euros, or $1.3 billion. The performance in the U.K. was lifted by the weaker pound, driving both local and tourist spending. Russia continued to outperform, posting double-digit growth over the year. The rest of Europe continued to be impacted by the decline in tourist flows, particularly in France, which saw an improvement in the last quarter of the year.
Sales in the Far East region were dynamic in the second half of the year, but overall were down 14 percent to 993 million euros, or $ 1.09 billion. In particular, revenues in Greater China were down 15 percent to 622 million euros, or $684.2 million. China recovered in the third quarter and began to deliver rapid growth. Hong Kong and Macau have significantly reduced the contraction seen in recent years, picking up at the end of the year.
“We have seen a rebound in China,” Bertelli said. He lamented a “less brilliant” performance of South Korea, impacted by that country’s political turmoil. “After 2008 and the crisis in Iraq, it’s not easy to manage these tensions that block tourist flows.”
Sales in the Americas were down 13 percent to 459 million euros, or $505 million, impacted by weaker tourist flows in the U.S. Brazil and Mexico showed a strong performance. The U.S. market was “better” in the December and January period, Bertelli noted.
After five years of consecutive growth, sales in Japan declined 5 percent to 389 million euros, or $428 million, as the stronger yen discouraged Chinese tourists.
Revenues in the Middle East declined 10 percent to 103 million euros, or $113.3 million.
By product category, leather goods were down 14 percent to 1.8 billion euros, or $1.9 billion, but the decline slowed in the second half. Launches, innovative products and a different range of prices are bringing results, Bertelli claimed.
Footwear was down 7 percent to 679 million euros, or $747 million, but Miu Miu delivered gains in the second half.
Rtw decreased 2 percent to 600 million euros, or $660 million, resuming growth in the second half of the year.
By brand, Prada was down 11 percent to 2.52 billion euros, or $2.77 billion, but the sales drop mitigated in the second half. Miu Miu decreased 9 percent to 515 million euros, or $566.5 million, but sales improved in the second half and turned positive in the last quarter.
Church’s was down 3 percent to 80 million euros, or $88 million. At constant exchange rates, the brand was up 6 percent.
During the year, the group generated a strong operating cash flow of 632 million euros, or $695.2 million, compared with 368 million euros, or $404.8 million, in 2015 thanks to the efficient management of net working capital, in particular to the significant reduction in inventory levels.
Self-financed capital expenditures totaled 251 million euros, or $276.1 million, compared with 337 million euros, or $370.7 million in the previous year, with the investment focus shifting from the expansion of the group’s retail network to the refurbishment of stores.
Asked by one analyst about mergers and acquisitions, Bertelli said he was “not thinking” of any, but that there was “no bias,” and that he was open to “review opportunities if they arise.”
Prada improved its net financial position to a positive 23 million euros, or $25.3 million, even after a dividend distribution of 281 million euros, or $309.1 million. This compares with a negative financial position of 111 million euros, or $122.1 million, in the same period the previous year.
In its report on Wednesday, Thomas Chauvet, managing director at Citi, said that “while multiple compression is highly likely if the scenario of a return to positive Retail SSSG and positive operating leverage does not materialize soon, we appreciate Prada brand’s credible turnaround brand in leather goods, hidden value at Miu Miu, cultural changes with regards to cost efficiency, potential tax benefits from patent box and easy comparatives. We were overall positively surprised by recent strategic initiatives aimed at improving product mix and retail experience, which we believe could bear fruits later this year.”